1) Fiscal policy:
- Involves the government and includes taxes and spending policy.
- When an economy is contracting, the government can choose to increase spending or reduce taxes to pump more money into the economy.
- During booming times, the government may raise taxes or reduce spending to dampen economic growth.
- Fiscal policy has long-term effects on economic growth
2) Monetary Policy:
- Involves control over the money supply and interest rates.
- Monetary policy is executed by central banks or other regulatory bodies who set interest rates, control inflation and manage the money supply.
- If the economy is not growing fast enough, the central bank can lower interest rates to encourage borrowing, this makes obtaining a loan easier, resulting in more money pumped into the economy.
- When inflation is too high, the central bank can raise interest rates to lower borrowing and spending, as well as make saving and holding money more attractive.
